By Jiangnan Lu; Image by Yahoo Finance
On April 20, 2023, Argentine Economy Minister Sergio Massa declared that the nation will be able to “program a volume of imports in yuan worth [the equivalent of] more than US$1 billion from next month” during a meeting with China’s ambassador Zou Xiaoli in Buenos Aires.
The start of such a deal between Argentina and China can be dated to the beginning of 2009, when former President Cristina Fernandez de Kirchner first reached an agreement on a swap program to increase the South American nation’s declining reserves. The agreement to prolong the program for a further three years was made in 2017 by China and the center-right government of President Mauricio Macri.
New updates continued to arrive. The Argentine central bank declared in 2018 that the government has “nearly closed” a new currency exchange agreement with China that would increase the reserves of the South American nation by the amount of $9 billion. After that, President Alberto Fernandez announced the agreement in November 2022 and stated that it was worth $5 billion at the time. Chinese economists consider the fact that the deal’s real worth was lower than both parties had anticipated to be good news for China.
The swap consists of a currency exchange to add 130 billion yuan to international reserves and a special activation to cover transactions on the foreign exchange market totaling 35 billion yuan. The leaders of the Chinese and Argentine central banks “confirmed that the deal for the swap of currencies between both institutions has been activated and committed to deepening the use of (Chinese yuan) in the Argentine market”
The government of Argentina needs to restock reserves, according to the Central Bank of Argentina, in order to pay for trade expenses and upcoming debt obligations. Increasing reserves is a fundamental goal of a significant debt agreement with the International Monetary Fund (IMF).
China recognized potential in switching from the use of U.S. dollars to the Renminbi (RMB), as it is Argentina’s second-largest trading partner after Brazil and the second-most significant market for Argentine exports. In a televised interview with China’s ambassador to Argentina, Zou Xiaoli, the minister stated that this would “replace” the use of Argentina’s US dollar reserves for commercial dealings with the Asian powerhouse.
This action is seen as evidence that the Argentine government is actively advancing the “de-dollarization” plan and working towards the objective of diversifying the monetary system, doing away with US influence as the dominant force in terms of the monetary system. The usage of yuan to pay for Chinese imports will aid in reducing foreign exchange pressures and growing foreign exchange reserves in light of Argentina’s declining dollar reserve crisis. Additionally, this project will increase mutual trust and cooperation between the two nations and raise the level of economic cooperation between Argentina and rising market nations like China.
China is actively promoting local currency settlement and the internationalization of the RMB on a global scale. Paying for Chinese imports with RMB not only encourages the expansion of RMB use abroad and its promotion, but it also helps to promote economic and trade relations. Chinese experts have attacked the Federal Reserve Bank for its ongoing interest rate increases, particularly those who are associated with the state-run media. Although somewhat advantageous for the functioning of the US domestic economy, other countries using the dollar would suffer. In a speech, Jilin University School of Economics Professor Li Xiao made a statement. According to him, under this system, the US develops a broad and deep financial market rather than a territorial control system to dominate the world’s resources. In actuality, maintaining the smooth operation of this dollar system, which is in the interests of the United States, is at the core of all internal and foreign policy of the country. It is visioned that using RMB as the unit of measurement in interactions with China will allow a country to significantly lessen its reliance on the dollar and lessen the negative effects of the currency’s interest rate hike on the local economy.
The majority of American sources have, however, noted that the dollar’s hegemony won’t be dispelled any time soon. The Chinese yuan may become more significant, but it is extremely improbable that it will overtake the US dollar as the world’s reserve currency, absent some truly drastic changes to China’s economic model. As a result of the U.S. weaponizing the dollar’s hegemony, other nations, particularly those under American sanctions, will look for alternatives. One option is the ascendant superpower’s currency, the Chinese yuan. However, the yuan only made up 2.7% of the world’s foreign exchange reserves in the previous year.
The currency transaction between China and Argentina is not an unusual one. China and Brazil established a new deal in March under which trade between the two countries will no longer use the U.S. dollar as an intermediary and will instead be handled in their own currencies. Additionally, the renminbi’s percentage of all foreign exchange transactions in Russia increased to about 40% from 0.32 percent prior to the start of the Russian invasion of Ukraine. However, the dominance of the dollar in the global economy is likely to persist, supporting American supremacy in international affairs. The dollar appears to be secure right now, despite China’s determination to overthrow the established order.